A firm in the 40% income tax bracket has an investment that costs

$300 in year 0, and offers a before-tax return (cash flow) in year 1 of $500. Assume that the firm’s before-tax opportunity cost of capital, as provided by the external capital markets, is approximately 20%. Its debt cost of capital is E(˜rDebt) = 15% + wDebt . 5%. Compute the APV, WACC, and a WACC-based value if the firm borrows $50 to finance it.

Repeat if the firm borrows $100.